Discounting based on Quantity?

"Locking in" business without knowing
more about your customer looks more like this.

Let’s think about quantity discounts.  For many folks the idea of “locking in” business by offering up a special discount seems to make sense when future potential is involved.  Here’s how it works.  Acme Manufacturing has yet to purchase your new product but based on your knowledge of the Acme’s size and an intuition that Acme could buy lots of your product, you provide a discount. 

Our analysis of many first time sales situations, indicates a couple of key points:  

First, the discounts are provided unilaterally, with no probing of the customer’s current purchase price.  What’s worse, we see this tactic used with new, emerging technologies and products never before introduced to the customer.  Sometimes, the seller offhandedly informs the customer, “The normal price for this product is $1,000, but I am going to knock off a hundred dollars so your ‘special price’ will be $900.”  Other times, the seller just provides a discount without even mentioning the deal.

Second, sellers provide these special deals without taking time to gather significant information from the customer on the value created by the product.  Many times sellers base their need to discount on information provided about a solution that didn’t really work; assuming something that didn’t work can even be called a solution.  Here’s an example of how that scenario might play out:

The salesperson is called to look at a waterproof motor in use at the customer facility.  The only issue is, the customer’s wash down procedure causes the motor to leak.  The motor fails regularly causing massive headaches, downtime and other electrical issues.  Somewhere along the way, the seller learns the old motor sells for $500 dollars.  The new technology will replace the motor.  Water issues will go away.  The new technology costs about 30 percent more than the failing technology of the past.  And, the customer uses quite a few of this type of motor.  So, the seller assumes they can’t sell their new product for much more than the $500 dollars already being spent.   I believe this is a major mistake.

There are three points sellers must understand…

1. Customers don’t have a true appreciation for discounts they see as “unearned.” 
According to research cited by negotiation expert Tony Perzow of SPASigma, potential customers see no real value in discounts which do not require something in return on their part.  What might be a better approach?  A discount which is tied to a long term commitment, a discount contingent upon placing a multi-piece order or a discount involving purchasing associated products.

2. Once the price level has been set, it is very difficult to raise the price.
Once a price is set, there is little opportunity to raise the price if the customer doesn’t meet your large order criteria; and this happens quite frequently.  Further, a discount provided up-front minimizes the opportunity to profitably provide added features, services or even a deeper discount if the customer does hold the key to big order potential.

3. Most sellers fail to understand the true cost of quantity discounting. 
For example, in the world of distribution, a gross margin of 25 percent is common.  Assuming there are no offsetting cost reductions such as order processing, shipping charges or discounts from your supplier, the math is relatively straight forward.  Using a 25 percent gross margin and a discount of 10 percent for the sake of easy math, we must sell something like 66 percent more product just to break even on gross margin.  Here is the formula:

Current Gross Margin / New Gross Margin = Unit increase required

We have attached a handy table developed by the State Government of Victoria to provide you with a handy reference guide. 

Checking the effect of discounts on the gross margin
If you cut your prices by...	And your present gross margin (%) is...
	0%	15%	20%	25%	30%	35%	40%
5%		50.0%	33.3%	25.0%	20.0%	16.7%	14.3%
6%		66.7%	42.9%	31.6%	25.0%	20.7%	17.6%
8%		114.3%	66.7%	47.1%	36.4%	29.6%	25.0%
10%		200.0%	100.0%	66.7%	50.0%	40.0%	33.3%
12%		400.0%	150.0%	92.3%	66.7%	52.2%	42.9%
15%			300.0%	150.0%	100.0%	75.0%

Of further concern in the distribution industry is that typical net profits run between 2-4 percent.  Shaving margin without some other offsetting factor can create profitability concerns.

There has to be a better way….

Wouldn't it be more appropriate to understand the customer’s situation before providing a discount?  Let’s start with a few questions:

• What is the customer’s problem with the current product used?  Breakdowns, scrap produced, bad data gathered, downtime, rejects or something else?
• What is the value of your solution to the customer?  To answer this, you must think about the cost of downtime, rejects produced, energy wasted, outsourced labor, repair parts consumed, etc.
• Does your solution help the customer avoid other costs?  Travel expenses might come into play here.
• Are the customer’s human resources better used because of your solution?  Referring back to travel expenses listed above, how much greater might the productivity of existing employees be if they weren’t sitting in a drafty airport waiting for the 5:50 AM flight out of town?

Finally and only after calculating the important stuff already listed, should these questions be pondered?

• What is a reasonable estimate of the cost of the previous solution, assuming one existed?
• What are the other costs associated with the old way of doing things?

I know what you’re thinking.  Sometimes, you don’t have time to explore the whole situation.  The customer calls and asks for a price.  What to do?  My suggestion is to stick with the standard cost.  Then begin to explore the situation.  You can always negotiate your price downward later.

Why Do Salespeople Need an Annual Plan?

I’m a Salesperson, for crying out loud, why do I need an Annual Plan?

Some will do just about anything before planning.
It takes more than just adding it to the top of your "do do" list.

Let me talk directly to my friends who fill the critically important role of Distributor Sales.

First, I consider myself to be a member of your brotherhood.  I know it’s a tough job.  Day after day, you load in to your vehicle, had out to face down angry customers, smart-alecky purchasing guys, and unsavory reps from vendors.  You trudge through rain, sleep, snow and traffic that would wilt the heartiest of letter carriers.  If no one has said it recently, thanks for what you do. 

Salespeople are the backbone of the Distribution Industry.  Now don’t you feel better?  But here comes the part where I explain precisely why you’ve got to make time for something many find distasteful.  Bear with me… I promise it will only take a moment.

Regardless of what you think, Annual Planning isn’t just for the guys up in corner offices.  Management needs to plan for financial ups and downs.  They need to worry about managing cash flow, maintaining the right inventory, measuring staff needs and budgeting for the coming year.  And, no doubt you will be asked to share in the fun.  Most of you will be asked to assist with sales projects.  Some of you will be assigned to being part of annual physical inventories.  A few might even be handed a paint brush as part of an end of effort to spruce up the office.  But there’s more for a salesperson to think about. 

Customers aren’t forever

Reviewing many distributors in a whole lot of industries, we’ve learned customers aren’t forever.  Typically, you can count on losing 10% of your “base” business every year to things like plant closings, mergers and acquisition activity, economic shifts and changing needs.  Simply stated, in order to stay even, you have to grow business by 10 percent.

A good annual plan would include evaluating customers on your list who may be on the decline.  Understanding where this loss will come from will direct your thoughts on call frequency and use of your time.

At the same time, determine which accounts are poised for growth.  Sometimes this has nothing to do with you.  If your customer has an expansion pending, your numbers may improve even without your special efforts.  But, working to increase your presence at a growing account pays larger dividends to your sales number.

Special pricing and supply contracts

Special pricing agreements have grown in importance in distribution.  In some lines of trade (like the Electrical and Automation business) they have literally exploded in use.  We tend to create them and forget them.  An annual plan would include reviewing the agreements for inconsistencies. 

Here’s how it works, a customer indicates they are going to buy hundreds widgets for their new project.  You provide them with a pricing agreement but sales of their new machine never took off.  But, when they buy a single part, they get the special price.  This fact cuts into your commission check and sets the wrong kind of expectation for the future.

A good plan includes candid conversations about raising the price to a more acceptable level.  While this may not be comfortable, we have discovered distributors who present massive price increases (6+ percent) often irritate the customer.  You can always lower the price later if and when their quantities grow. 

Pushing the envelope further, do you have any accounts where a special price agreement might give what one client calls “the new exclusive”?  Formulating special pricing agreements, locks out competitive distributors who handle the same product lines.
Click here for a brief tutorial on special pricing agreements

Personal Positioning with Supply Partners

We all have them; friends and allies who sometimes can make our job a bit easier.  They tip you off to opportunities.  They give you insider information.  They allow you to make more money for yourself and for your company.  And, sometimes they are easy to overlook.

Now is the time to plan a meeting with each of these people to talk about their goals and plans for the next year.  Chances are any manufacturer’s salespeople need extra details to feed back to their headquarters group.  Investing in a planning meeting will strengthen your relationship and create future opportunities.

Planning for information storage and retrieval

A lot has happened in the world of distributor data.  CRM systems spring up everywhere.  New ERP operating systems are being sold daily.  New phone apps, smart phones, tablets and internet availability nearly everywhere make it hard to keep up with things. 

In some instances we sales types have been left with more options, but never a clear cut path to bringing all the data together in the way we can use it.

I recommend spending some time thinking about what customer information you need on a daily basis.   We could do it just about any time, but end of year is a great time to plan and begin your implementation.  What information?  How will you add to it?  Where will you keep it?  What’s important for you versus requested/required by management?

Calculate the Gross Margin potential per call

Plan by understanding the gross margin potential required attain your 2014 goals.  Selling is an emotional endeavor.  We all have our favorite customers.  They appreciate the work we do, they greet us warmly and make the people side of the job pleasant.  But, are they big enough or likely enough to warrant our time? 

I have a spreadsheet used to calculate the gross margin potential for sales calls.  Shoot me an email; I will share it with you.

There’s more but….Lot’s more…

This message might run for another couple thousand words, but nobody would read it.

Let me sign off with a list of topics you need to think about:

·       Sales Skills – What are you doing differently today than five years ago?

·       Product Training – What are your strengths and weaknesses?

·       Specialists – Are you getting the full bang for the buck from the ones you work with?

And my favorite

Vacation, relaxation and play – Work hard, play hard.  Have you pondered loading the gang into the old family trickster and hitting the road for Iowa?  If your kids haven’t seen the sun shining over 13.7 Million acres of corn, they may be missing out.

Don't forget about our planning special running through the end of December.  It's a great time to help yourself and the nerds on your team.
Yeah, you read that right!  

InTech Magazine: People are the Right Stuff

This month the fine folks at InTech Magazine were kind enough to ask me to write an editorial on the automation market.  My guess is they really wanted someone who was “long in the tooth” to comment on the cavalcade of changes in product technology – "a back in my day the PLCs ran on kerosene" sort of piece.  

Being a distribution guy, I penned “Selecting an Automation Distributor?  It’s about finding the right stuff”.  In the automation world, over 89% of the customers buy from distributors.  Yet many

are tossing dimes down the drain because they aren’t tapping into the right distributor services. 

Catch us on Lulu.com

In the article I charged customers with asking their distributors these questions:

·         What can your organization do to improve the uptime of my facility?

·         Do you have a plan to help us drive down our cost of doing business?

·         Do you offer one-on-one training for our engineers, technicians, and electricians?

·         How will my support calls be handled? What are the hours of operation?

I went on to say…

The “distribution” of product has not been prominently mentioned anywhere. In today’s world, we have plenty of really good products, quality is a given, and logistics channels move them from one corner of the continent to another in hours. Today, people are the right stuff. If distributors are not actively involved in enabling your people, they are not doing their job.

The whole article is posted here: